Economist Dec 6th 2014

Sheikhs v shale

  • since July high of almost $115, now near 40% plunge;
  • the main culprits – oilmen of North Dakota and Texas – has boosted American’s oil production by a third;
  • positives: equivalent to a 2% pay rise, global GDP should rise, reduce already-low inflation, encourage central bankers towards looser monetary policy;
  • losers: oil producers including Russia, Nigeria, and Venezuela;
  • Saudi Arabia’s stand: let the price fall and put high-cost producers out of business;
  • Different economics of shale: can be drilled as little as possible, thus being less vulnerable to shocks or manipulation

The whole business becomes a bit more like manufacturing drinks: whenever the world is thirsty, you crank up the bottling plant.

E.ON and E.OUT

  • Germany’s Energiewende, or “Energy transition”, aims to shut down all nuclear plants by 2022; before, renewable energies are heavily subsidized;
  • E.ON announced a spin-off between its nuclear business and fossil fuels – not necessarily a creation of “bad utility” (“looking for investors who haven’t read a newspaper since the Energiewende began”): the new firm will be born debt-free and have provisions to cover the exit from nuclear power and shareholders could expect respectable cash dividends;
  • Hostile regulatory environment not the only reason: energy sector is becoming more decentralized and making more use of data – GE and Siemens are investing to make grids smarter;
  • On the other end, Germany cannot quit nuclear power while making a pell-mell exit from fossil fuels;

In a bind

Saudi Arabia, the leading member of OPEC, has made it clear it will tolerate lower prices in order to do the shale firms’ finances what fracking does to rocks.

  • Two generalizations: the industry’s economics are good at almost any price (big independent firms, operating costs were $10-20 per barrel); it is far less clear if the industry can profitably invest in new wells to maintain or boost production (at $60, investment could drop by as much as half);
  • another vulnerability: weak balance sheet; invest more than they earn, and increasing leverage;
  • adversity may make shale stronger – it will prompt a new round of innovation, from cutting drilling costs through standardization to new fracking techniques that increase output;

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